## Accounting and Finance >> Time Value of Money

# Payments, Annuities, and Payment Timing

Take Note

- Loan payments usually occur at the end of the period.
- Lease or rent payments usually occur at the beginning of each period.

An

**Annuity** is a stream of cash flows where equal payments occur at fixed intervals for a specific period of time. For example, you may decide to save money over the next year by making payments of $100 per month into your savings account. The future value of the annuity would be the payments you have made to your savings account plus all the compounded interest you earned on those payments at the end of the year.

Fixed payments made on a loan, or the fixed monthly rent made on a lease are also considered annuities. In an

**ordinary annuity**, payments are made at the end of the period. For example, the first payment on a loan is made at the end of the month after the money is borrowed. When performing calculations for an ordinary annuity on a financial calculator, the calculator must be set to calculate payments to occur at the

**END** of each compounding period.

An

**Annuity Due** is a cash flow stream where the payment is due at the beginning of the period. An example of this is a lease when you must pay the rent at the beginning of the month. When performing calculations for an annuity du on a financial calculator, the calculator must be set to calculate payments to occur at the

**BEGINNING** of each compounding period.

Financial calculators should offer a setting to indicate whether the payments occur at the Beginning or End of the period. The default setting should be for payments to occur at the end of each compounding period. Generally, loans and investments are calculated as if payments occur at the end of the period. Leases are generally calculated as if payments occur at the beginning of the period.